Economics

China’s Global Ambitions Could Split the World Economy

Xi Jinping is quickly creating an international ecosystem of his own—and that may not be good for companies.

A street in Huinan Town, Pudong, Shanghai, on Oct. 3, 2017.

Photograph: ImagineChina

After the fall of the Berlin Wall, many economists and policymakers assumed the world would become one happy, prosperous economy. Aided by the spread of capitalism and technology, countries would be increasingly knit together by trade, finance, and the internet. There would, of course, be the occasional setback—such as the 2008 financial crisis. But ultimately the forces of globalization would prove irresistible and ever-tighter integration inevitable.

A serious obstacle has emerged to that vision. It’s not Donald Trump’s threat of trade wars or Brexit or terrorism. It’s China.

If we tease out the trends taking shape in China and its relations with the U.S. and other developed countries, we can foresee an unhealthy schism forming and widening in coming years. The global economy could be split into two giant parts. One would be centered in the U.S. and the European Union; the other would revolve around China.

Listening to the rhetoric streaming out of Beijing, it’s easy to believe that China remains intent on melding itself into the global economy. In his speech to open the latest Communist Party congress, President Xi Jinping promised to give foreign companies wider access to China’s markets and protect their rights and interests. “China will not close its door to the world; it will only become more and more open,” he told the delegates. Xi has also painted himself as a champion of free trade and an international statesman, eager to take the lead on global issues such as climate change, in contrast to an isolationist, “America First” Trump.

Don’t be fooled. The problem with Xi’s version of globalization is he wants to control it. Instead of integrating China into the existing world order, he is creating a separate economic bloc, with different dominant companies and technologies, and governed by rules, institutions, and trade patterns dictated by Beijing.

Xi’s government is in the midst of a national drive to develop or acquire its own technology and promote its own companies to rival the West’s, in industries of the future ranging from robotics to electric cars, often backed by a torrent of state aid. The goal is ultimately to squeeze foreign companies out of the gargantuan Chinese market, then use it as a launchpad for Chinese powerhouses to expand and compete globally. The scope of Beijing’s ambitions is detailed in an industrial program called “Made in China 2025” that’s been widely reported on. As Xi told the party congress: “China will support state capital in becoming stronger, doing better, and growing bigger, turn Chinese enterprises into world-class, globally competitive firms.”

A possible unintended consequence of such policies could be the emergence of a distinct Chinese market. While Beijing might be successful at pushing foreign competitors out of China—a market it can control—wooing foreign customers could prove much tougher. Burdened by a shoddy reputation and probably little or no technological advantage, Chinese brands will have trouble displacing more established ones in major markets, while security concerns could keep international companies from buying Chinese-made chips and other IT gear. The top four Chinese makers of smartphones now command two-thirds of their home market; but their combined market share abroad is less than 15 percent, according to second-quarter data compiled by Strategy Analytics Inc. And despite all the subsidies and investment lavished on the Chinese automotive industry, it exported fewer vehicles in 2016 than in 2014.

We can see the process of cleavage most clearly in China’s digital sphere. While most of us share baby pictures on Facebook, tweet on Twitter, and search on Google, Chinese communicate over WeChat, run by Tencent Holdings; microblog on Sina Weibo; and search on Baidu. That’s because the giants of the worldwide web are either severely restricted or blocked in China.

Although it exists primarily for political purposes, the so-called Great Firewall also acts as a nontariff barrier, allowing Chinese companies to flourish in the absence of international competition. Meanwhile, these same Chinese players have struggled to attract an international audience. An attempt by e-commerce titan Alibaba to start a U.S. online marketplace lasted only a year, before it sold control of the site in 2015. WeChat, which almost a half billion people will use this year in China—according to an estimate by research outfit eMarketeer, has had trouble expanding abroad beyond Chinese communities, despite aggressive marketing efforts. Heightened concerns about the use of private data will likely limit the ability of China’s tech giants to become global players, since it seems almost impossible that they could resist demands by the Chinese government for such information. In a 2016 report, the human rights advocacy group Amnesty International ranked Tencent dead last among 11 messaging-service providers in protection of personal data through encryption.

In reaction, the West is slowly pulling back from China, too. Washington policymakers have traditionally preached that economic openness always wins the day, but as the alarm over Chinese practices slowly grows, sentiment is turning toward protecting American interests. In September the Trump administration nixed a bid by a China-backed investor to acquire a U.S. chip company, while the government-appointed committee that reviews foreign acquisitions for national security threats hasn’t cleared the purchase of U.S. payment services outfit MoneyGram International Inc. by Alibaba founder Jack Ma’s Ant Financial Services Group. Across the Atlantic, European Commission President Jean-Claude Juncker in September laid out his own plans for scrutiny of sensitive acquisitions in Europe by, for instance, “a foreign state-owned company.”

Meanwhile, U.S. companies, feeling less and less welcome amid Xi’s new economic nationalism, are souring on China. In its latest survey, the American Chamber of Commerce in China found that 56 percent of its members consider the country a Top Three priority for investment, down from 78 percent in 2012, while a full quarter said they’ve moved operations out of China in the past three years or are planning to do so.

China has no intention of becoming isolated. Beijing is crafting alternatives to the institutions and norms of the West, aiming to foster a Chinacentric system of economic relations. For instance, Beijing spearheaded the creation of the Asian Infrastructure Investment Bank, a multilateral lender to rival the World Bank. Xi is also promoting the massive “One Belt, One Road” infrastructure-building program to tie economies across Asia and Europe more closely to China. Projects will likely be financed by China-backed banks and executed by Chinese companies.

Washington is certain to fight to preserve the current global economic system. “We will not shrink from China’s challenges to the rules-based order,” Secretary of State Rex Tillerson said in an October speech.

The separation between China and the West will probably never become as complete as the bipolar world of the Cold War. Chinese will likely continue to sip Starbucks lattes and wear Nike sneakers, and Americans will still find Chinese-made goods in their local Walmart. But as China asserts its growing clout and the U.S. and Europe defend their companies, technology, and institutions, the chasm will widen. Countries that have their own issues with the West, such as Russia, will get sucked more and more into China’s orbit. Others, wary of China’s escalating power, such as India or Japan, could move closer to the U.S.

A split would have terrible consequences for the global economy. Companies in both blocs would find access to key markets restricted, hindering profits, productivity, and job creation. Cut off from much-needed technology and markets, Beijing could struggle to raise the incomes of its 1.4 billion people, still poor and rapidly aging. The odds of a military confrontation between China and the West could increase sharply.

This bipolar future isn’t inevitable. Perhaps Beijing will realize that it’s better off supporting the current order than undercutting it. After all, China’s integration with the rest of the world has been the key driver of its economic success since the 1980s. The U.S. and its allies may step back from protectionism and continue to work with Beijing to meld China into the existing system. But the trajectory China and the West are hurtling down doesn’t bode well. If a new wall rises across the world, everybody loses.

    BOTTOM LINE - Xi Jinping’s vision of a world dominated by Chinese technologies and brands is one that threatens to split the global economy into two distinct blocs.
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